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Euro slips back, as Italy agrees a budget

The US dollar managed to push higher after Wednesday’s Fed meeting, even if US bond yields weren’t able to. The ambiguity behind the Fed’s messaging appears to have sent mixed signals to the markets as to how the Fed sees the path of interest rates, when set against the health of the US economy.

Fed chairman Jerome Powell’s comments that the FOMC weren’t seeing any evidence of significant inflationary pressure helped push yields off their highs this week, with today’s latest core PCE numbers, the Fed’s preferred measure for inflation, expected to show inflation steady at 2%.

The US consumer continues to look resilient with today’s personal income and spending numbers expected to show rises of 0.4% and 0.3% respectively.

Not surprisingly President Trump was none too happy at the rise in rates, expressing his displeasure, a distinct contrast to comments he made back in October 2015 when he criticised the Fed for keeping rates low for political reasons. Who’d be a central banker?

Despite this equity markets underwent a positive session with markets in Europe shrugging off the political goings on in Italy with respect to the setting of the latest budget amidst divisions as to the level of spending. Markets in Asia have continued this theme of positivity with the Nikkei 225 hitting levels last seen in the early 1990’s.

Agreement on the Italian budget was eventually reached on a budget for 2019 of 2.4% of GDP, a move that could see the Italians censured by Brussels who wanted the budget to come in under 2% of GDP, and finance minister Giovanni Tria who was looking for the number to come in somewhere between the two.

All in all, it still looks set to be a positive week for European stocks as we come to the end of Q3, and despite all the concerns about trade, the imposition of tariffs, and fractious politics, equity markets look set to close the quarter on a broadly positive note.

The euro had a disappointing day, sinking against the US dollar as events in Italy played out, shrugging off a surprise jump to 2.3% in preliminary German CPI numbers for September. This could be a one off or it could confirmation of the inflationary pressures ECB President Mario Draghi was referring to earlier this month. Today’s flash EU CPI numbers for September are likely to see a similar upward spike in them later this morning, with an expectation of number in the region of 2.1%, though this could come in higher. The big test will be whether core prices move in unison and edge back away from the 1% level that they’ve been stuck at for about three years now.

The pound has had a disappointing month bedevilled by Brexit uncertainty and political infighting across government and opposition parties. The odds of a Brexit deal have decreased markedly in the past few weeks, with the UK government and the EU at an impasse, unnerving financial markets and weighing on the pound despite an economy, that while not ripping up any trees, still appears to be ticking along.

The political picture has become even more complicated by the fact that the Labour Party have pledged to vote against any deal the Prime Minister makes unless it meets their six tests for an acceptable deal. The irony is that if Labour were in government they wouldn’t be able to pass the tests either, given the EU’s red lines. Politics is well and truly broken in the UK, with the prospect that we could well see the clock run down into next year, unless there is a significant shift in the political mood.

On the data front today’s final Q2 GDP adjustment is expected to show the UK economy at 0.4%, with business investment rising 0.5%.

EURUSD – the euro looks set for a return towards the lows this month after breaking below the 1.1690 level, with the next support at the 1.1620 area. A move below 1.1620 reopens the 1.1520 area. Still range bound with resistance back above 1.1750.

GBPUSD – the failure at the 1.3220 area has seen the pound slide back towards the lows this week at 1.3050. We need to see a move back through 1.3220 to argue for a return to the 1.3300 area. The larger support remains back towards the 1.3000 level with the 50-day MA at 1.2990.

EURGBP – slid back towards the 0.8880 where we’ve found some support, with broader support at the 0.8840/50 area. Interim resistance now comes in at 0.8940 with the bigger level remaining back at the 0.9040 area.

USDJPY – moved up through the 113.20 level and the highest levels this year bringing the prospect of a move towards the November 2017 peaks at 114.73. Support now comes in at the 112.60 area and below that at 111.80.

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